House Passes New $1.9 Trillion Spending Bill
After a wave of selling ended a strong February on weak note Friday, energy bulls have picked back up this morning, pushing prices back up 1% or more in the early going, and keeping the upward-sloping trend lines intact for now. Don’t be fooled by the big “increase” in RBOB prices from Friday, April RBOB is now the prompt contract, and is trading some 10 cents above where March left off as we transition to the summer-grade spec, but cash prices are only up around 1.5 - 2 cents so far this morning.
Friday’s selloff in energy contracts coincided with a big pullback in equity markets that appear spooked by a rise in interest rates that means borrowing money won’t be free forever. Stocks are also back on the move higher this morning after the House passed a new $1.9 trillion spending bill this weekend that includes the largest stimulus checks to date and reminds the market that both fiscal and monetary policy makers are eager to do whatever is needed to keep people spending.
Progress with refinery restarts continues across the Gulf Coast with more plants returning to rates similar to where they were at before the polar plunge, while others are still expecting several weeks to finish repairs. Tight allocations remain across much of the southern half of the country, while sporadic outages continue to be largely contained to parts of West Texas.
The shortages continue to help crack spreads for those plants that are able to operate, and Delek mentioned in an earnings call last week that it may restart its Krotz Springs, LA refinery that has been idled for months, if margins hold at current levels. Unfortunately Delek’s El Dorado Arkansas facility suffered a fire during turnaround work this weekend that injured six workers. While that fire won’t impact regional supplies since the plant was already down for the turnaround work, it is a reminder of how complex (and often dangerous) those plants are, and why it’s not like flipping a switch to bring those facilities shut by the storm back online.
OPEC & friends are meeting Thursday to discuss changed to their oil output agreement, and it seems like the market expects them to announce increases to the quota. We know many countries in the cartel are pushing to increase output, which forced Saudi Arabia to announce a unilateral production cut last year to prop up prices, so the question seems to be how much will the Kingdom allow.
Iran rejected direct talks with the U.S. over its nuclear program, a move that suggests tensions between the two countries will continue, and that Iranian oil currently sanctioned is not likely to hit the market (legally anyway) any time soon.
The CFTC weekly commitments of traders report showed new bets on lower prices decreased the net length held by money managers in WTI, ULSD and RBOB contracts last week, while Brent saw a small increase in net length held by large speculators. The net bets on higher prices held by money managers in WTI remains near a 2.5 year high despite the small pull back last week. In gasoline meanwhile, the large speculators seem to be continuing to head for the exits, in what appears to be a bet that the spring rally was actually a winter rally this year, and after prices nearly doubled it’s time for a pullback.
Baker Hughes reported four more oil rigs were put to work last week, all of which came from the Permian basin. Since the total rig count bottomed out in August, we’ve seen the total count increase in 23 out of 28 weeks, adding a total of 137 rigs. On the other hand, there’s still about 470 rigs left to add before we see drilling activity reach pre-COVID rates.
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Energy Markets Rally Again Thursday After A Choppy Wednesday Session
Energy markets are trying to rally again Thursday after a choppy Wednesday session. RBOB gasoline futures are leading the push higher, on pace for a 3rd consecutive day of gains after finding a temporary floor Tuesday and have added 12 cents from those lows.
Equity markets are pointing sharply lower after a weak Q1 GDP estimate which seems to have contributed to a pullback in product prices over the past few minutes, but don’t be surprised if the “bad news is good news” low interest rate junkies start jumping in later on.
The DOE’s weekly report showed sluggish demand for gasoline and diesel, but inventory levels in most markets continue to follow their typical seasonal trends. Refinery runs held fairly steady last week with crude inputs down slightly but total gross throughputs up slightly as most facilities are now back online from a busy spring maintenance season and geared up for peak demand this summer.
Propane and propylene exports spiked to a record high north of 2.3 million barrels/day last week, which demonstrates both the US’s growing influence on global product markets, and the steady shift towards “other” products besides traditional gasoline and diesel in the level of importance for refiners.
The EIA acknowledged this morning that its weak diesel consumption estimates reflected the switch to Renewable Diesel on the West Coast, although they did not provide any timeline for when that data will be included in the weekly survey. The agency acknowledged that more than 4% of the total US consumption is now a combination of RD and Biodiesel, and that number is expected to continue to grow this year. This morning’s note also suggested that weak manufacturing activity was to blame for the sluggish diesel demand across the US, while other reports suggest the freight recession continued through Q1 of this year, which is also contributing to the big shift from tight diesel markets to oversupplied in several regions.
Valero kicked off the Q1 earnings releases for refiners with solid net income of $1.2 billion that’s a far cry from the spectacular earnings north of $3 billion in the first quarter of 2023. The refining sector made $1.7 billion, down from $4.1 billion last year. That is a pattern that should be expected from other refiners as well as the industry returns to a more normal market after 2 unbelievable years. You wouldn’t guess it by looking at stock prices for refiners though, as they continue to trade near record highs despite the more modest earnings.
Another pattern we’re likely to see continue with other refiners is that Renewable earnings were down, despite a big increase in production as lower subsidies like RINs and LCFS credit values sting producers that rely on those to compete with traditional products. Valero’s SAF conversion project at its Diamond Green joint venture is progressing ahead of schedule and will give the company optionality to flip between RD and SAF depending on how the economics of those two products shakes out this year. Valero also shows part of why refiners continue to disappear in California, with operating expenses for its West Coast segment nearly 2X that of the other regions it operates in.
Week 16 - US DOE Inventory Recap
Energy Markets Trading Quietly In The Red As Ethanol Prices Rally To Five-Month High
Energy markets are trading quietly in the red to start Wednesday’s session after a healthy bounce Tuesday afternoon suggested the Israel-Iran-linked liquidation had finally run its course.
There are reports of more Ukrainian strikes on Russian energy assets overnight, but the sources are sketchy so far, and the market doesn’t seem to be reacting as if this is legitimate news.
Ethanol prices have rallied to a 5-month high this week as corn and other grain prices have rallied after the latest crop progress update highlighted risks to farmers this year, lower grain export expectations from Ukraine, and the approval of E15 blends this summer despite the fact it pollutes more. The rally in grain and renewables prices has also helped RIN values find a bid after it looked like they were about to test their 4-year lows last week.
The API reported small changes in refined product inventories last week, with gasoline stocks down about 600,000, while distillates were up 724,000. Crude oil inventories increased by 3.2 million barrels according to the industry-group estimates. The DOE’s weekly report is due out at its normal time this morning.
Total reported another upset at its Port Arthur refinery that’s been a frequent flier on the TCEQ alerts since the January deep freeze knocked it offline and damaged multiple operating units. This latest upset seems minor as the un-named unit impacted was returned to normal operations in under an hour. Gulf Coast basis markets have shrugged off most reports of refinery upsets this year as the region remains well supplied, and it’s unlikely we’ll see any impact from this news.
California conversely reacted in a big way to reports of an upset at Chevron’s El Segundo refinery outside of LA, with CARBOB basis values jumping by more than a dime. Energy News Today continued to show its value by reporting the upset before the flaring notice was even reported to area regulators, proving once again it’s ahead of the curve on refinery-related events. Another industry news outlet meanwhile struggled just to remember where the country’s largest diesel seller is located.
Click here to download a PDF of today's TACenergy Market Talk